Revisited: Granholm v. Heald and the Wine Industry

This blog entry was originally posted on August 7, 2010, five years after the Supreme Court decided a major case impacting the wine industry. The decision Granholm v. Heald remains important to the wine industry and provides great context for the types of legal issues the American wine industry faces on a day-to-day basis. Because I believe this case to have such a strong influence on the American wine industry, I think it is worth revisiting. Below please find a summary of the background pre-Granholm, a summary of the case, and the legal environment post-Granholm.

General Information on Granholm

In the 2005 opinion of Granholm v. Heald, the Supreme Court ruled in a 5–4 decision that state laws allowing in-state wineries to make direct sales to customers but effectively authorizing out-of-state wineries to make sales only through wholesalers at a greater expense are unconstitutional. The Court reasoned that these laws discriminated against interstate commerce, thus violating the Commerce Clause of the United States Constitution (Art. I, § 8, cl. 3), and were not defensible under the Section 2 of the 21st Amendment. It was further acknowledged that “the constitutional authority of the state to regulate the importation of intoxicating liquors was limited by the requirement under U.S. Const. art. I, § 8, cl. 3, that such regulation could not discriminate against the out-of-state wineries in favor of in-state wineries.” Granholm v. Heald, 544 U.S. 460 (2005). Granholm still serves as good law today for state regulations pertaining to wine sales amongst interstate and intrastate wineries, as well as its constitutionality discussion, and is one of the most recent cases entailing wine laws to reach the Supreme Court.

Legal Environment Pre-Granholm

The nexus of Granholm spans from two distinct and conflicting district court rulings. Two states, New York and Michigan, had laws that prohibited or effectively prevented out-of-state wineries from selling products directly to consumers. Michigan’s law, which was facially discriminatory, allowed in-state wineries to ship directly to in-state consumers, subject to licensing requirements, but all out-of-state wine products were required to be sold from in-state wholesalers before said products could be sold to consumers. New York’s law was more regulatory: it required (1) all wine to be sold through a licensee fully accountable to the state, (2) in-state producers, in order to ship directly to consumers, to obtain an applicable license, and (3) out-of-state producers, in order to become a licensee and gain direct shipment advantages, to establish an in-state distribution operation (consisting of a branch office and warehouse, which posed to be costly, especially for smaller wineries). Moreover, the New York law prohibited out-of-state wineries from obtaining a “farm winery” license, which provided for the most direct manner of shipment to consumers and were not permitted to distribute their wines through direct shipment of applicable in-state licensees.

During this time period, the majority of wine distributors opposed allowing direct shipment by wineries, asserting that even a small winery’s direct shipment was a threat to distributors. Many distributors believed their line in the distribution process served as a barricade against even the remote possibility for criminal influences in the liquor industry and/or the illegal sales of liquor to minors over the Internet. Remember that much of the direct sales, especially from out-of-state wineries, were conducted over the Internet during a time period of global technological expansion. (In fact, from 1994 to 1999, the amount of consumer spending on direct wine sales doubles and reached about $500 million, or about 3% of all wine sales.) (Federal Trade Commission.) In addition, that time period saw a dramatic growth in the number of small wineries throughout the United States, and direct shipping via the Internet was viewed as a means for such small wineries to increase their sales and shipments.

Essentially, a group of Michigan residents brought suit against state officials in federal district court, alleging that Michigan’s direct-shipment laws discriminated against interstate commerce and violated Article I, § 8, cl. 3 of the United States Constitution. The district court granted summary judgment to the defendants, but on appeal, the Sixth Circuit reversed, remanded, and concluded that the 21st Amendment was not grounds for defense of the laws and Michigan’s regulations were unconstitutional because the state did not prove that it could not meet its procedural objectives through nondiscriminatory manners.

The story for New York is quite the contrary. Out-of-state wineries and several New York consumers filed suit against state officials in New York federal court, also alleging that the New York laws violated the commerce clause. The district court granted plaintiffs summary judgment, but on appeal, the United States Court of Appeals for the Second Circuit reversed and held that New York’s laws fell within legal scope of the 21st Amendment.

The United States Supreme Court, in 2005, granted certiorari to both of these cases. In its decision, it affirmed the judgment of the Sixth Circuit and reversed that of the Second Circuit.

Supreme Court’s Analysis in Granholm

Justice Kennedy delivered the majority opinion of Granholm, asserting that the direct-shipment laws of both New York and Michigan violated the Commerce Clause because neither state substantiated that its objectives could not be obtained by other nondiscriminatory mechanisms and that Section 2 of the 21st Amendment was not a justifiable ground to regulate interstate commerce in a discriminatory manner, giving preferential treatment to in-state wineries.

In his analysis, Kennedy greatly relied on the history of the Commerce Clause, the text of which is cited below:

“[The Congress shall have power] To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes;” U.S. Const. art. I, § 8, cl. 3.

Historically, this clause has been read to disallow states, except in the narrowest of circumstances, from discriminating against interstate commerce. In other words, a law in one state that denotes preferential treatment to the business of the state and grants subordinate power or substantial burdens to outside states, without proper justification proving that these objectives could not be achieved in another non-discriminatory fashion, would most likely be declared unconstitutional under U.S. Const. art. I, § 8, cl. 3. Kennedy justified that the systematic laws of both New York and Michigan were “obvious” in their discrimination and that the results “could effectively bar small wineries” from those markets. 544 U.S. at 474. Although New York’s laws were not outright discriminatory, through its analysis of the culmination of the state’s law, the Court “[had] no difficulty concluding that New York, like Michigan, discriminates against interstate commerce through its direct-shipping laws.” 544 U.S. at 476.

To contend this, both states argued that their statutes were constitutional under Section 2 of the 21st Amendment, affirming that the Amendment gave the states the authority to discriminate against out-of-state goods. The text of Section 2 of the 21st Amendment reads as follows:

“The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors in violation of the laws thereof, is hereby prohibited.” U.S. Const. amend. XXI, § 2.

Through another historical analysis of the 21st Amendment, the Court visited the purposes of both the Wilson Act (1890), which granted the states the power to regulate imported liquor “to the same extent and in the same matter” as domestic liquor but did not allow states to discriminate against out-of-state liquor, and the Webb-Kenyon Act (1913), which essentially provided federal support to prohibition endeavors to curb liquor consumption and extended aims of the Wilson Act.

In rejecting the states’ arguments, the Court explained that “the aim of the Twenty-First Amendment was to allow States to maintain an effective and uniform system for controlling liquor by regulating its transportation, importation, and use. The Amendment did not give States the authority to pass nonuniform laws in order to discriminate against out-of-state goods, a privilege they had not enjoyed at any earlier time.” 544 U.S. at 484–485. The Court recognized that, although the states do have broad power under section 2 of the 21st Amendment, “this power, however, does not allow States to ban, or severely, limit the direct shipment of out-of-state wine while simultaneously authorizing direct shipment by in-state producer.” 544 U.S. at 493.

The states also argued that, by allowing direct shipment of wine by out-of-state wineries, their 10th Amendment “policing powers” were severely limited and that minors with access to credit cards and the Internet could purchase an illegal substance through direct shipment. The Court rejected this argument, affirmed that, “the States provide little evidence that the purchase of wine over the Internet by minors is a problem. Indeed, there is some evidence to the contrary. A recent study by the staff of the FTC found that 26 States currently allowing direct shipment report no problems with minors’ increased access to wine.” 544 U.S. at 490. The Court also reasoned that, if credit were to be attributed to the states’ argument, that the discriminatory laws against interstate commerce would still not be justifiable. “As the wineries point out, minors are just as likely to order wine from in-state producers as from out-of-state ones . . . . In addition, the States can take less restrictive steps to minimize the risk that minors will order wine by mail.” 544 U.S. 490–491.

Finally, the Court rejected New York’s argument that tax-collection was a justifiable ground for its direct-shipment regulations. Kennedy’s opinion reasons that this is not illusory, but reiterates that such objectives can be attained through other non-discriminatory measures.

What is the Result of Granholm for the Wine Industry?

Essentially, the legal result of Granholm is this: a state’s regulation that permits in-state wineries to directly ship to consumers but restricts or prohibits out-of-state wineries from direct shipments violates the Commerce Clause of the United States Constitution and is not authorized by Section 2 of the 21st Amendment.

What does this mean to wineries? Manifestly, state laws must comply with the Granholm ruling. However, not all state direct-shipment regulations are identical and certainly do not procure matching ramifications. However, after Granholm, direct shipment laws must apply identically to both in-state and out-of-state producers such that if state laws allow direct shipment to one type of producer, the same remittance must be given to the other. Post-Granholm, some states allow a relatively low volume of direct shipment to consumers whereas other state laws allow direct shipment to consumers only if the wine was purchased in person at the winery. Other states have adjusted their laws to accommodate smaller wineries and allow direct shipment to wineries that produce under a certain amount of gallons of wine per year. States are also allowed to completely ban direct shipment, and essentially mandate wholesale distribution, as long as the laws apply equally to both in-state and out-of-state producers. Regardless of its effect, Granholm incorporates an important postulate: know your direct-shipment laws.

For more information, access the full opinion at Granholm v. Heald or listen to the opinion at Granholm v. Heald.

For more information on wine or alcohol law, direct shipping, or three-tier distribution, please contact Lindsey Zahn.

DISCLAIMER: This blog post is for general information purposes only, is not intended to constitute legal advice, and no attorney-client relationship results. Please consult your own attorney for legal advice.